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firm and the company and there was no written document
showing the relationship between the parties or stating the
terms in which the business was to be carried on between
them. (Note the lengthy agreements in the Sazio case.) In
addition, the newly-formed company had no competing line
in any of the added lines and had there been any competition
with the garment firm that line would not have been
continued. :

It is essential in any incorporation to ensure that the cor-
poration is provided with powers to carry out its duties and
does in fact carry on the business on its own behalf and not
as a puppet of Mr. X or a mere assignee of his income.

 

AN INCORPORATION MUST NOT BE A SHAM

The documentation must jive
with reality.

 

ployed by a corporation controlled by a chartered

accountant who was a friend of his. He paid the cor-
poration $500 per month to provide him with a receptionist,
accounting, office management and stenographic services.
The corporation paid his wife $465 a month to perform
these services. The $6,000 per year deductible expenditure
that Dr. Murphy paid the corporation that employeed his
wife was disallowed by the Minister of National Revenue. In
this situation the documentation existed in so far as the com-
pany involved was wholly owned by a chartered accountant
but in reality it did nothing for the doctor beyond terming
his wife its employee. It was an artificial transaction, or as
the courts would say, ‘“‘a sham, a cloak, a simulacrum”’.

Bee years ago a doctor arranged for his wife to be em-

 

AN INCORPORATION MUST BE MORE
THAN A TAX SAVING DEVICE
The documentation’s sole objective
must not be tax reduction.

 

only motivation for incorporation. If, however, the

corporation is a bona fide business transaction with
commercial objectives, then, any resulting saving in income
will be regarded as incidental to the overall plan.

In one case the courts contended that the management
company incorporated by a lawyer was really used as a two
way conduit pipe through which to move funds back and
forth between his practice and the corporation, for the ‘sole
purpose of artificially reducing income.

What happened in this case is quite interesting. The lawyer
had a private management company incorporated, of which
he and his wife became the only shareholders and of which
he became the president. An agreement was signed by the
management company and the law firm under which the
company took over the control and supervision of the law
office administration in return for a management fee of
$1,000 per month. During the first nine and a half months of
the company’s existence, the lawyer, as the company’s agent,
spent a fair amount of time improving the administrative
efficiency of his law practice. He received no remuneration
from the company for his services although the law practice

le object of tax avoidance must not emerge as the

FEBRUARY 1974

DOUGLAS COLLEG
ARCHIVE

vn e §
[ eG eS continued

had paid $9,500 to the company. In the meantime, the com-
pany had purchased from the lawyer’s wife the house in
which he lived. The lawyer gave his wife his promissory note
for the net purchase price, and set up a credit to himself on
the company’s book for the same amount. The company
then paid him $9,000, as part repayment of its indebtedness
to him. On the same day, the lawyer deposited the $9,000 in
the bank account of his law firm treating it as a loan payable.
In reporting his income from his law firm, the lawyer
deducted the $9,500 management fee as an expense. The
Minister refused to allow the deduction, claiming that the
$9,500 was not an expense incurred for the purpose of earn-
ing income, that the expense was not reasonable, and that, in
any event, the deduction could not be allowed because it
would artificially reduce the lawyer’s income. The courts
upheld the Minister’s judgement.

But in another case the courts allowed a deductible ex-
pense, because they ruled that the facilities company was
incorporated and did in fact supply all the facilities, equip-
ment and employees for the doctor’s practice.

In other words the courts must find some other reason
besides the intent to save tax to justify the fact of
incorporation. $

 

     

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VANCOUVER CALENDAR MAGAZINE 53

LIBRARY